Dollar rebounds as Trump considers more tariffs on Canada, Mexico
(Bloomberg) — The dollar rebounded after posting its biggest drop in 14 months on bets that U.S. President Donald Trump’s tariff plan will spur inflation and prevent the Federal Reserve from further cutting interest rates.
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The Bloomberg Dollar Index rose 0.7% in Asia on Tuesday as New York stocks tumbled as Trump said he may impose 25% tariffs on Mexico and Canada in February. Both currencies fell more than 1% against the dollar before retreating.
“If there are 25% tariffs on Mexico and Canada, then higher tariffs on China will certainly be imposed soon after,” said Rodrigo Catrill, a strategist at National Australia Bank in Sydney. “The dollar still has room to move higher. “
The dollar fell immediately after Trump took office on bets he would delay immediate tariffs. The sudden reversal highlighted how nervous traders are about any news about tariffs and their impact on the global economy. Trump's earlier pledges, including imposing tariffs of up to 60% on goods from China, sent shockwaves through the $7.5 trillion-a-day foreign exchange market.
Risks from Trump's high tariff policy and solid economic expansion are expected to make the Federal Reserve cautious about cutting interest rates and support the dollar's resilience. Still, the future scope of Trump's protectionist trade measures and the timeline for their actual implementation remains an open question that traders are watching closely.
Overnight index swaps put the chance of the Fed cutting its benchmark interest rate more than once this year at 69%, up from 46% on Friday. SMBC Nikko Securities and Nomura Securities both said U.S. Treasury yields could fall further.
U.S. Treasuries rose as global cash trading resumed after a U.S. holiday on Monday, largely reflecting the president's decision on his first day in office to avoid imposing certain tariffs on China. U.S. benchmark yields fell nearly 10 basis points to 4.53%.
“The market has been eyeing the big tariff bazooka from day one,” said Shoki Omori, chief global strategist at Mizuho Securities. “The absence of that, especially the absence of China, is driving a relief rally in U.S. Treasuries.”
The offshore yuan fell as much as 0.4%, dragging down the risk-sensitive Australian and New Zealand dollars. The People's Bank of China set the yuan reference rate at its highest level since November 8, signaling that it is increasing support for the yuan.